Assume your 45-year-old friend is critically ill and will die by tomorrow morning unless something extraordinary is done. Miraculously, it becomes possible for you to save your friend. But to do so you have to shorten the lives of all other Americans by a small amount. By taking away ten seconds of life from someone else, you can extend the life of your friend by five seconds. When this transfer is made from all 260 million Americans, he will receive approximately an additional 41 years and four months of life, thus achieving an enviable life span of over 86 years.
Will you use your power to save your friend? Almost surely the answer is yes. Will saving your friend be an act of virtue? The answer to this question is more complicated. Saving your friends life will be widely perceived as a virtuous act, but a strong case can be made that it would be a harmful act of callous self-interest. The sharp contrast between perception and reality in this fabricated example is unfortunately relevant to the world of politics, and explains why organized interest groups can capture small private gains at great social costs through political actions widely seen as virtuous.
I readily admit that if a good friend of mine were desperately ill, I would save him by shortening the life of everyone in the general population by a few seconds if I had the power to do so. Although the gain in life for him would be less than the total loss of life for others, the gain would be dramatically visible, greatly appreciated, and easily associated with my act of kindness, while the loss would be so diffused that it would go completely unnoticed. Even if the others were aware of their cost for saving my friend, a large majority of them would probably vote in favor of making their individual sacrifice (and obligating others to do the same) to extend his life, since that sacrifice was so low. We could all feel the warm glow of compassion over our virtuous sacrifice for the good of another.
There is a problem here, however. If it is so noble to save my friends life by transferring a few seconds from everyone else, then it must also be equally noble to extend this benefit to others. But consider the destructive consequences of each of us having the power to add years to our best friends life (which in most cases would be our own) by reducing the life of everyone else by a few seconds (but with the total life lost being twice that gained). With everyone trying to lengthen his or her life at the expense of others, the result would be an early death for everyone. Generalizing the earlier example of a two-second loss for a one-second gain, if everyone attempted to capture 41 years of additional life by transferring seconds from others, everyone would have his or her life shortened by 41 years. For someone my age this would, at best, mean instant death, and more likely a retroactive one.
So if the ability to extend one persons life by shortening the lives of others were immediately generalized to everyone, the consequences would be quickly recognized as disastrous. But if only a few had this ability initially, and it was expanded to more people very gradually, it would take a while for the harmful consequences to be noticed.1 And probably people would be unaware of the connection between the reduced life expectancy of most and the longer life span of the few, the result being a clamor to expand the method prolonging the lives of the few. Even when the connection between the expanded transfer process and the ever-shortening life expectancy began to be recognized, no one would willingly cease attempting to benefit from the transfers. The person who unilaterally refused to transfer years from others to himself would lose twice the life expectancy as before, as others continued to transfer life from him to themselves. Of course, there might be a movement to stop the transfer process if anyone were left alive to initiate it.
But what if the destructive effect of the transfer process were masked by medical advances that caused a slight increase in life expectancy? Then the life lost because of the transfers might go largely unnoticed. Some would understand the harm being imposed by the transfers, but they would find it difficult to get people exercised by the loss of what they never had, which exists only in a counterfactual setting with which they are not familiar. Also, any attempt to get people to oppose the transfers faces a serious free-rider problem. Why should an individual incur a private cost in an effort that, even if successful, provides general benefits to everyone regardless of his or her contribution to the effort? For each person the advantage is in devoting the effort necessary to benefit from transfers, an effort that concentrates a benefit entirely on him or her, rather than in making the far less decisive effort to achieve benefits for the general public.
Of course, my example of extending the lives of some by reducing the lives of others is fortunately a fanciful one. Unfortunately, it describes all too well the type of transfer that increasingly dominates the political process. The coercive power of the federal government to perform its few legitimate functions has always been a source of temptation for those who see the possibility of solving their problems through transfers from others. The case for yielding to this temptation is superficially appealing because government transfers could create concentrated and visible benefits for politically organized and appreciative groups while spreading the costs so widely that they go largely unnoticed.
Fortunately, for approximately the first 100 years after the ratification of the U.S. Constitution, the prevailing understanding was that the role of government was a limited one. Government was not intended to solve the problems of individuals; rather it was to establish a setting in which they could best solve their own problems in productive cooperation with each other. That view was exemplified by Grover Clevelands 1887 veto of a bill passed by Congress to provide $10,000 to drought-stricken farmers in Texas. In his veto message Cleveland stated, A prevalent tendency to disregard the limited mission of [the governments] power and duty should be steadfastly resisted, to the end that the lesson should be constantly enforced that, though the people support the Government, the Government should not support the people.2
Unfortunately, as Cleveland was vetoing seed bills, U.S. Supreme Court decisions began opening the door for increased government regulation of the economy.3 Regulation, supposedly aimed at protecting the general public against abuse by business and other organized interests, is invariably controlled by those interests to reduce the competition they face. That amounts to a transfer from the general public to those being regulated, in the form of higher prices and a less productive economy. The growth of such transfers began rather modestly. Resistance to it was well entrenched, but the concentrated benefits appeared larger than the diffused (but actually larger) costs. As the number of beneficiaries increased with little apparent cost, the case for including more beneficiaries seemed compelling. Even when the costs of government transfers were noticed, they were seldom associated with the transfers that caused them. Indeed, the costs created by the transfers were commonly cited as problems that justified government solutions in the form of yet further transfers. The most egregious example of hoping the cause can be the cure was the expansion of government control in response to the depression of the 1930s, a depression prolonged, if not caused entirely, by a combination of federal tariff increases and Federal Reserve mismanagement of the money supply.
Soon government transfers were going beyond protective regulation and increasingly taking the form of direct payments and subsidies. In 1900 the entire federal budget amounted to only about 3 percent of the nations GDP, with little of it devoted to transfers. By 1962 federal transfers to individuals (not including interest payments) amounted to 27 percent of federal outlays and to 5.2 percent of GDP. By 1993 federal payments to individuals had increased to 56 percent of federal outlays (85 percent when interest payments and national defense are excluded) and to 10.5 percent of the GDP.4
These budgetary transfers are almost always rationalized in the name of some noble public objective-helping the poor, protecting American jobs, saving the family farm, making the American economy more competitive. The reality is that the benefits from these transfers are concentrated primarily on organized interest groups and do little to achieve the noble objectives. Indeed, progress toward the goal is invariably retarded as the costs of transfers spread inefficiencies throughout the economy. Poverty programs have increased the number and dependency of the poor, trade restrictions and export subsidies have destroyed more productive jobs to save less productive ones, farm subsidies have done more to help large corporate farms than small family farms, and corporat welfare has hindered American competitiveness by subsidizing failure.
Those failures are rooted in the fact that, just as in my life-extending example, government transfers add less value than they destroy. Government transfers systematically reduce the productivity of the economy, productivity essential for solving the social problems the government claims to be addressing. The wastefulness of government transfers is inherent in the very process that explains them. Because the benefits of transfers are concentrated, they are magnified by the political process, while the dispersed costs are devalued. The result is that the political benefit-cost comparison continues to show gains from transfers long after the social benefit-cost comparison is decisively negative. The ratio of losses to gains from many political transfers is far larger than the 2-to-1 ratio assumed in the example of life-expectancy transfers. For example, in California taxpayers are paying for water-diversion projects that provide water at $212 per acre-foot to farmers who pay for it at a rate of $3.50 per acre-foot.5 Or consider amendments to the Clean Air Act that protected Eastern coal producers against competition from Western coal by imposing scrubber requirements on electric generating plants to remove sulphur even if they burn low-sulphur Western coal. It has been estimated that this requirement costs electricity consumers approximately one dollar for every nickel it transfers to coal producers, not to mention the resulting reduction in environmental quality.6
Yet, attempts to point out the failure of an ever-expanding government role in the economy are typically met with complacency and often hostility. Again, as with the example of transferring life expectancy, it is easy to see the concentrated benefits from government transfers. Its even easier to ignore the generalized costs and see them as unrelated to the benefits. The economy, after all, has continued to grow. It would be difficult for anyone to know just how much greater that growth could have been, and most people are unaware of how costly even a slight reduction in economic growth is over time.7 And even if people were aware of the general costs of government transfers, no individual would see the advantage in opposing them in general since the private advantage lies in getting more transfers for your group. Those who do suggest cutting back on transfers will encounter hostility from the beneficiaries, who realize that the amount they have to pay for the transfers to others is independent of whether or not they continue to receive theirs. Even many of those paying for a benefit going to others often respond negatively to advocates of reducing, or eliminating, that benefit because of its visible virtue and the lack of a detectable cost to any individual.8
The dynamic of government transfers is an insidious one that invariably leads to the disastrous situation Bastiat predicted: the state becomes that great fictitious entity by which everyone seeks to live at the expense of everyone else.9
Both the fanciful possibility of helping some people with transfers of life from others, and the factual possibility of helping some people with government wealth transfers from others, illustrate the perversities that result when people attempt to do good at others expense. Such attempts always give the appearance of promoting virtue while destroying the discipline and accountability that makes real virtue possible.
1. I assume here that there is a strict limit on how much life can be transferred from others.
2. Quoted in Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York: Oxford University Press, 1987), p. 84.
3. Higgs discusses many of these decisions and their consequences in ibid. Also see Terry Anderson and Peter J. Hill, The Birth of a Transfer Society (New York: University Press of America, 1989).
4. These figures come from Herbert Stein and Murray Foss, The New Illustrated Guide to the American Economy (Washington, D.C.: The AEI Press, 1995), p. 212.
5. See Dennis C. Mueller, Constitutional Democracy (New York: Oxford University Press, 1996), p. 11.
6. See George Daly and Thomas Mayor, Equity, Efficiency and Environmental Quality, Public Choice, vol. 51, no. 2 (1986): 141-59.
7. It should be noted that the larger government involvement in the economy, the more the official national income statistics overstate the national income. The growth in the private sector is determined by the amount people voluntarily pay for goods and services. Since there is generally no market for government-provided services, they enter into the national income accounts at the cost of providing them, which is almost always greater than their value. So GDP can, and often is, increased by government transfers that reduce the total value of economic output. To bring my example of transferring life expectancy in line with government transfers, the additional life one received from a transfer would have to be counted for more than it actually is.
8. Because the influence of any individual voter on a political decision to make a transfer is effectively zero, the opportunity cost of favoring a transfer is also effectively zero, even if the transfer is known to be individually costly. Therefore, if a person has been led to believe that a transfer is virtuous and he places even a modest value on the sense of virtue that comes from supporting the transfer, he will vote for it regardless of the personal cost if it passes. See Geoffrey Brennan and Loren Lomasky, Democracy and Decision: The Pure Theory of Electoral Preference (Cambridge: Cambridge University Press, 1993).
9. Quoted in George Roche, Free Market, Free Men: Frederic Bastiat, 1801-1850 (Hillsdale: Hillsdale College Press and The Foundation for Economic Education, 1993), p. 150.
|Dwight R. Lee is a Research Fellow at The Independent Institute, William J. ONeil Endowed Chair Global Markets and Freedom and Scholar in Residence, Southern Methodist University, and contributing author to the books, Arms, Politics and the Economy: Historical and Contemporary Perspectives and Taxing Choice: The Predatory Politics of Fiscal Discrimination.|
This article is reprinted with permission from The Freeman, September 1997. © Copyright 1997, the Foundation for Economic Education.